Importance of Understanding All Risk Policies

In insurance markets it is seen that insurers initially offer single peril policies and then move on to multi-peril policies, package policies and so on. However, as customer expectations rise and owing to regulatory prodding and competitive intensity, insurers tend to offer more and more policies on an “all risk” basis. The shift to all risk policies however, may not be properly understood by many.

Courts when dealing with all risk policies or when using wide terms tend to interpret the term in the widest sense. This is clearly seen in the case Amrit Lal Sood & Anr vs Smt. Kaushalya Devi Thapar & Ors (1998) decided by the Supreme Court of India. In para 5 the SC stated: In the present case, the policy is admittedly a ' comprehensive Policy'. 'Comprehensive insurance' has been defined in Black's Law Dictionary 5th edition as 'All risk insurance' which in turn is defined as follows: -

" Type of insurance policy which ordinarily covers every loss that may happen, except by fraudulent acts of the insured. Miller v. Boston Ins. Co. 218 A. 2d 275, 278, 420 Pa. 566. Type of policy which protects against all risks and perils except those specifically enumerated."

It may be seen that the SC understood the term motor comprehensive policy more widely than was the norm, as an ‘all risk” policy. In addition, to explain what is an all-risk policy the SC’s quote referred to the US case Miller v. Boston Ins. Co. decided by Supreme Court of Pennsylvania in 1966.

In that case the court stated that the first duty is that of the insured: “it is a necessary prerequisite to recovery upon a policy for the insured to show a claim within the coverage provided by the policy”; and then cited many judgements to rule that “"A defense based on an exception or exclusion in a policy is an affirmative one, and the burden is cast upon the defendant to establish it.” This means that it is a burden of affirmative duty on the insurer to prove the exception.

Thereafter the court cited cases which indicated that the burden of the insured is light in proving a loss in an all risk policy but the burden of the insurer was higher in proving an exclusion/breach. Reference was made to?the case Mellon v. Federal Ins. Co.,?14 F.2d 997 ?(D.C.S.D. N.Y. 1926), where the eminent Judge HAND stated in the context of the "all risks" policy: "The perils clause is an 'all risk' clause, and the libelant has discharged his burden when he has proved that the loss was due to a casualty and was caused by some event, as here by the hydrostatic test, covered by the general expressions of the policy. 'He is not bound to go further, and prove the exact nature of the accident or casualty which in fact occasioned his loss.' British Foreign Marine Ins. Co. v. Gaunt (1921) A. C. 41.

He further reminded that core insurance concepts were intact in all risk policies: “As Lord Sumner said, in the recent case of British Foreign Marine Co. v. Gaunt (1921) 2 A.C. at page 57: 'The expression does not cover inherent vice or mere wear and tear. . . . It covers a risk, not a certainty; it is something which happens to the subject-matter from without, not the natural behaviour of that subject-matter, being what it is, in the circumstances under which it is carried. Nor is it a loss which the assured brings about by his own act, for then he has not merely exposed the goods to the chance of injury; he has injured them himself. Finally, the description 'all-risks’ does not alter the general law; only risks are covered which it is lawful to cover, and the onus of proof remains where it would have been on a policy against ordinary sea perils.' See, also, Schloss Brothers v. Stevens, [1906] 2 K.B. 665; Grant Smith Co. v. Seattle Construction Dry Dock Co., [1920] A.C. 162."

Thereafter the court referred to: George J. Couch, in his excellent "Cyclopedia of Insurance Law", 5 Couch on Insurance, p. 4152, Sec. 1169, says: " 'All risks.' — An insurance may be in general terms, by a policy covering all risks. Thus, a policy against 'all risks,' the words being inserted in writing, ordinarily covers every loss that may happen, except by the fraudulent acts of the insured." See also?Sun Ins. Office, Ltd., v. Clay,?133 So.2d 735 ?(1961). Therefore, we must conclude that the very nature of the term "all risks" must be given a broad and comprehensive meaning as to covering any loss other than a wilful or fraudulent act of the insured.

The court thereafter noted that “The applicable rule of law was initially set forth in?Agriculture Insurance Co. v. A. Rothblum, Inc.,?147 Misc. 865 ,?265 N.Y.S. 7 . It was there held that the sole obligation of the plaintiff was to furnish the defendant with such explanation as it, in good faith, had received and accepted as to the time and cause of the loss. If we were to require the plaintiff to go further and guarantee the accuracy of the explanation of the loss that might have been given to it by the person to whom custody of the goods had been entrusted and who, himself, might be guilty of a fraud unknown to the plaintiff, the inclusive character of the coverage afforded by the insurance policy would be a mere delusion.” The court further noted that: “The burden of proving that the loss came within the exception rested on defendant. Agricultural Insurance Co. v. Rothblum,?147 Misc. 865 ,?265 N.Y.S. 7 ."

Referring to a Jewellers Insurance Policy case (Balogh v. Jewelers Mutual Insurance Co., 167 F. Supp. 763 (S.D. Fla. 1958), the court stated: “As can be seen, defendant relies to a large extent on semantics. Under his theory, any loss, the exact cause of which could not be proved by at least a preponderance of the evidence, would automatically be classed as a mysterious disappearance, and recovery would be defeated unless the plaintiff could prove a theft, embezzlement, or some other specific cause. What then becomes of the 'all-risk' feature of the policy? As the Court said in Chase Rand Corporation v. Central Ins. Co. of Baltimore, in construing such a feature of a Jeweller’s block policy: 'Plaintiff's sole obligation was to furnish defendant with such explanation, as it, in good faith, received and accepted concerning the time and cause of the loss, and this it has done. If plaintiff were required to go further . . . the inclusive character of the coverage of the insurance policy would be a?delusion, and a snare' (emphasis in original) citing and relying upon Agricultural Insurance Co. v. A. Rothblum, Inc., which had held that 'in an action by the insured against insurer, the onus would not be upon the insured to allege and prove, as a condition precedent, that the loss was not occasioned by the specified exceptions. Rather it would be incumbent upon the insurer to allege and prove, as a condition subsequent, that the loss arose from one of the excepted causes.'

Summary of points made:

1. It is a policy which ordinarily covers every loss that may happen, except by fraudulent acts of the insured
2. First, it is necessary for the insured to show the claim was within the coverage provided by the policy
3. The onus of proving an exception has to be an affirmative one – the onus is on the insurer only.
4. The insured is not bound to prove the exact nature of the accident or casualty which in fact occasioned his loss
5. The term "all risks" must be given a broad and comprehensive meaning
6. Insurer cannot rely on semantics and narrow the coverage, because then all risk feature of the policy is lost.
7. If the insured is required to go further . . . the inclusive character of the coverage of the insurance policy would be a?delusion, and a snare'